Of all the different agreements in your contract portfolio, leases may be one of the most difficult to manage. Between the lack of standardization of clauses and terms, numerous key dates to track, automatic provisions and the host of related documents to organize, lease management can take up a huge portion of in-house counsel’s time — especially if their organization is in an industry that relies heavily on leases, like logistics, real estate or construction.
The good news, however, is that every other business and legal department is facing these challenges as well. Legal departments that find solutions to their lease management challenges stand to save their organization a significant amount of money and contribute a competitive advantage at the same time.
But before these challenges can be solved, they must be understood. Let’s dive into the unique challenges that leases pose, and how the legal department can address them.
Bridging the gap between searching and reporting
Not every organization realizes that they should be conducting comprehensive reviews of their lease portfolio on a regular basis. And when they do, they often struggle to build insightful reports from the results of their portfolio search.
When your leases are stored in a lightweight contract repository solution or a spreadsheet, your ability to pull key data points is limited. At best, legal professionals can search for a few terms and identify which contracts are leases or contain leases (if they are labelled and tagged as such). What’s more, searching through your contract portfolio in this way depends on knowing what to search for. It can be easy to miss relevant documents that fall out of the search scope or include far more documents than is feasible or necessary to review.
Naturally, reporting on lease data obtained in this way is mostly a manual process. When a market event poses a risk to your lease portfolio — such as the COVID-19 pandemic — legal departments are left scrambling to build a report clarifying exactly how much risk their organization faces and what needs to be done. Slow, manual reporting makes it more likely that the legal department will miss key dates, locking the organization into unnecessary leases that were automatically renewed. Any kind of analysis that touches your lease portfolio will be less timely and less responsive.
What’s more, since many organizations rely on a barebones contract repository or spreadsheets for lease management, the odds are your search capabilities won’t serve up all pertinent information to your report, making your conclusions less reliable.
Ensuring compliance and auditability
Since 2019, leases fall under the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) 842. Essentially, leases that affect companies’ financial reporting, are subject to Sarbanes-Oxley and must be made available to auditors.
Thus, in order to ensure their organization doesn’t face any increased risk exposure from their lease portfolio, legal professionals must work with the financial department to ensure all leases are accounted for and that the right data is made available for financial reporting.
Some businesses are content to leave different contracts distributed across departments, but in order to ensure compliance with regulations like ASC 842, the legal department should really be the final owner and overseer of the organization’s entire contract portfolio. This way, if an audit does occur, legal will have a comprehensive and well-organized contract repository that makes it easy for auditors to examine any leases they wish to see.
Managing lessor paper
When leasing property or equipment, often the lease contract is laid out in the lessor’s format, with their preferred terms and clauses. While the legal department would certainly examine any high-profile agreements with a fine-toothed comb, the bulk of any organization’s lease portfolio consist of smaller, less noticeable agreements.
Lessors may insert clauses and terms into their agreements that don’t meet your organization’s legal standards. The legal department will catch and negotiate such agreements when they’re high profile, but it’s the multitude of minor, low-profile agreements that add up to create risk exposure and revenue leakage.
Identifying embedded leases
Building out a well-organized contract portfolio would be significantly easier if all your organization’s leases were labeled as such. But many leases are hidden within other contracts that seem to have little to do with leasing on first blush.
A wide variety of agreements could contain embedded leases, such as:
- Transportation and logistics agreements with leases on warehouses and trucks
- IT agreements with leases on data centers and servers
- Contract manufacturing agreements with leases on specialized tooling
When your organization holds thousands or tens of thousands of agreements, finding which contracts contain embedded leases is obviously a huge challenge.
Yet it’s a challenge that must be overcome. Your organization needs to be prepared for an audit, needs to know when its leases expire or will be automatically renewed, and needs to track key data, such as whether leased property equipment is fully insured, whether incentives aren’t being taken advantage of, the number and nature of easements and so on.
Fortunately, there are solutions to make this and other lease management challenges easier to tackle.
Foundations for modern lease management
Leases may present a host of unique challenges, but modern lease management also provides solutions. It’s just a matter of adapting and adopting the right technology.
1. A robust contract repository
The most important tool for a legal department to leverage when managing their lease portfolio is a contract repository. Some organizations are still relying on spreadsheets to centralize their agreements or mere file directories. Worse still — some organizations have no system for centralizing their contract portfolio, and merely leave the storage and maintenance of different agreements up to the relevant business units.
Without a centralized repository, any sort of search, analysis, or reporting on your lease portfolio will be impossible. Other capabilities may make lease management easier, but a contract repository makes it possible.
2. Optical character recognition
Optical character recognition, or OCR, is a machine learning technique that enables software to identify letters and other type characters from images. Since so many leases tend to be on the lessor’s paper, often the copy you’ll receive for your contract repository will be a scanned document or a PDF.
Image files like these are an example of unstructured data — that is, data that cannot be easily collected, processed and analyzed. Using an OCR solution translates the unstructured data from, for example, your scanned property rental agreement into structured data that is far easier to search through, extract and analyze.
Without OCR, you won’t be able to easily surface leases for an audit, and any reports you run on your lease portfolio would be incomplete. With OCR, you can ensure that you have a more complete picture of your entire portfolio, no matter what form your leases take.
3. Natural language processing
Like OCR, natural language processing (NLP) is a machine learning technique. In essence, it enables computers to understand the meaning of words and phrases, rather than merely recognize them. As a machine learning technique, NLP can be “trained” to understand the meaning of words and phrases specific to a given subject matter, such as the legal industry in general and leases in particular.
With a purpose-built NLP algorithm, legal departments can identify all leases and rental agreements in their contract portfolio — assuming they’re centralized in a contract repository and any unstructured documents have been processed through OCR.
This includes embedded leases, too. Since NLP provides computers with an awareness of context and semantic meaning, it can identify contractual terms that are equivalent to a lease even if the words “lease” or “rent” are never actually used. In fact, a well-trained NLP algorithm isn’t just faster than a human, but often more accurate as well.
Lease management in practice
Advanced machine learning techniques are all well and good, but the impact of these techniques in practice is what counts.
Our work with Hub International serves as a particularly relevant example of how modern lease management can help reduce costs and enable data-driven decision-making. Hub International is the 6th largest insurance broker in the world and, as a result, holds a huge real estate portfolio consisting of 450 offices. Maintaining and managing this portfolio was a massive drain on resources, both in terms of time and money.
By applying the solutions described in this article among other approaches, Exigent was able to reduce Hub International’s property-related costs by 10 percent and improve their asset utilization by 20 percent.
No two organizations face the same challenges in their lease portfolio, however. Don’t hesitate to talk to us about the unique lease management needs your organization is facing.